Why Apple Inc. Earnings MUST Hit This Number (AAPL)

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Apple Inc. (AAPL) is set to announce its quarterly earnings results after the bell Tuesday — so the question a lot of investors are asking themselves is, “Should I have a stake in AAPL?”

Why Apple Inc. Earnings MUST Hit This Number (AAPL)If recent history, and sentiment, have anything to say in the matter, then the answer is “no.”

Recent quarters have failed to rally support for Apple stock. Over the past two years, AAPL shares have averaged a return of 4.3% a month after each earnings report. While that sounds good, it’s only slightly better than the 2.95% one-month average returns that Apple stock has experienced at any point over the past 15 years.

However, if you look closely at 2015’s quarterly reports, and there’s a vastly different story. Apple stock has returned an average of -13.2% the month after reporting so far this year.

The difference?

For one, a miss on iPhone sales in fiscal Q3 spooked investors and triggered a massive selloff this summer. Meanwhile, the rate in growth in revenues and earnings is on the decline as well.

Combined with overly optimistic sentiment, we have a situation in which Apple stock is more likely than not to sell off on anything less than blockbuster results.

Investor sentiment gives us an impression of investors’ expectations ahead of an earnings announcement, and in Apple’s case, expectations are on the rise.

One of the simplest views of investor sentiment comes by way of the earnings “whisper number,” currently at $1.93 per share compared to Wall Street’s $1.88 expectations. The lofty whisper estimate is only the first sign that investors have set the earnings bar too high for Apple stock.

Options activity on the stock is revealing that investors have loaded up on calls ahead of the event. Apple stock’s put/call ratio has dropped from 0.85 to 0.75, meaning that there are 75 puts trading for every 100 calls on the stock.

Bottom line is that the increase in expectations ahead of Apple’s earnings announcement is flashing a warning sign from our models, which now estimate that the company will have to beat current Wall Street expectations by at least 4 cents per share — so, $1.92 — to avoid an 8% decline in share value from its current price.

Consequences of the company posting anything less than an earnings beat include the stock trading back into bear market territory, which is represented by trading below Apple stock’s 20-month moving average. For perspective, AAPL last broke into bearish territory in early 2013, declining another 25% before posting a tradable bottom.

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Given the current earnings expectations, investors should consider operating with a tight stop-loss strategy on Apple stock if they already own shares.

If you don’t hold them, wait — you’re likely to get an opportunity to take a bite at lower prices after their earnings results.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/why-apple-inc-earnings-must-hit-this-number-aapl/.

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